Estate Planning

What is a probate?

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You may think that after your loved one passes away, everything they own will simply go to their spouse, children, siblings, or closest family members. Unfortunately, it’s not that simple.   

With a few exceptions discussed below, when you die, your assets will go through court. This is called probate.

(For a more detailed step-by-step breakdown of how a probate works, please read our article here)

Probate court is a specialized court that handles the distribution of property and debts of deceased persons. Probate courts and judges help ensure that the decedent’s creditors are paid before any assets are distributed to their heirs. Why? Because if there was no probate, creditors would have to chase multiple people to trace where the decedent’s assets went. This would actually cause more lawsuits to be filed. Instead, when a person dies, everything gets consolidated into one court to handle the administration of affairs, who is owed what, and how much. Unfortunately, this is both time-consuming and expensive. The cost of a probate is paid through the decedent’s assets.

It’s often said, “Probate is a lawsuit that you file against yourself, using your own money, for the benefit of your creditors.” 

Who is a creditor?

A creditor can be an individual or a company or even a governmental institution. When a person dies, he or she might have had hospital bills, credit card bills, mortgages, insurance payments, business debt, car loans, utility bills – all in their name. Additionally, the IRS is always owed money when someone dies, because a final tax return is still due and, what’s more, the decedent’s accounts will still be generating income even after death! Think about a savings account or a brokerage account, for example. The income still grows, even after death. So all of this accounting needs to be handled in the probate, along with the debts owed to other creditors.

If I pay the debt off faster, does the probate end faster?

Not really. There are rules set up that allow potential creditors to still file a claim against the estate, so waiting unfortunately is a necessary evil.

Is there still a probate if the decedent did a will?

If you die without a will, it’s called “dying intestate.”  If you die with a will, it’s called “dying testate.”  When you die testate, it means after the probate is done, your estate will be distributed to the people in your will. If you die intestate, it means after the probate is done, the judge will determine who will get the assets that are left (California Probate Code includes specific rules under Probate Code Section 6400-6414 regarding who can inherit the deceased’s assets when no will has been created).

Either way though, probate is necessary in both those situations.  This is important to understand. Having a will does not avoid a probate. (A trust however can avoid a probate).

People often hold the mistaken belief that if they draft a will, their loved ones will not have to go through Probate court to inherit assets.  Unfortunately, this is not true. A will, by definition, needs to be “probated,” or in other words, it needs to be reviewed and approved by a probate court. ) It’s important to note that a will also does not help in cases of incapacity.)

Is there still a probate if the spouse is alive?

This is a common question and it depends on how the assets was titled. If the asset was in the name of just one of the spouses and the other spouse was not named either as a co-owner or beneficiary, then yes, there is still a probate! Some people mistakenly believe that a spouse doesn’t have to go through a probate in California because “California is a community property state.” These are two different topics and don’t get confused! Probate is determined strictly on who is on title. If the spouse isn’t an owner or beneficiary, then there is a probate still.

Do all assets go through probate? What if I own an asset jointly with another person, or they are named as a beneficiary?

There are some assets that will not go through probate. We discuss some common examples below, but note that there are some risks involved in each of these approaches:

  • Beneficiary Designations – If an asset has a beneficiary attached to it, it will not go through probate if the following factors are satisfied: (1) the named beneficiary is a living adult; and (2) the beneficiary can be located. For example, a retirement account or life insurance policy may name a beneficiary. If the beneficiary is a living adult who can be located, the money in the account belongs solely to the beneficiary and no probate is necessary as long as the institution holding the money can distribute the funds to the beneficiary. Potential problems with beneficiary designations include:
    • Minor beneficiaries: If the beneficiary is your minor child, there will be a probate court proceeding called a “guardianship of the estate” because a minor child cannot “own” the asset until he or she has reached 18 years old. A guardianship of the estate is problematic because the court will be involved on an annual basis.
    • Incapacity issue: If you are incapacitated, you effectively will be unable to access your funds because of your incapacity, and your beneficiary also will be unable to access your funds because you are still alive.
    • Unintended beneficiaries: Sometimes people name beneficiaries and forget to update contact them. Often, folks will still have ex-spouses named as beneficiaries instead of children. In those cases, the funds legally belong to the beneficiary. In other situations, beneficiary information is not updated and so institutions cannot locate the intended person(s).
    • Inability to control distributions: One of the downsides of beneficiary designations is that the beneficiaries can do whatever they want with the funds. While this may be fine for some people, for younger beneficiaries it can be a recipe for disaster as it’s not uncommon for younger beneficiaries to lose their inheritances rather quickly.
    • If beneficiary predeceases: If the primary beneficiary is alive at the time the owner of the account dies, but then the primary beneficiary dies before the distribution of the asset, there is a probate! Many people – including advisors – mistakenly assume that the asset will automatically go to the contingent beneficiary named on the account, but that only occurs if the primary beneficiary pre-deceased the owner.

  • Joint ownership – If an asset is owned jointly, it will not go through probate if the following factors are satisfied: (1) the named account holder is a living adult; (2) the person can be located; and (3) if the joint ownership consists of either joint tenancy or community property. For example, a home owned by husband and wife as community property with rights of survivorship would avoid a probate if one of them died. A bank account owned as joint tenants would also avoid probate if only one of them died. Potential problems with joint ownership include:
    • Tenants-in-common: If a home is owned as a tenant-in-common, then the death of one tenant-in-common leads to a probate of his or her share. This is a big difference between joint tenancy, in which the share of the decedent will automatically pass to the other joint tenants.
    • Unintended consequences: Many times a parent names one of their children to be a co-owner on a bank account (or home). The parent thinks that if something happens, the child will take over the asst. The asset however now legally belongs to the child when the parent dies. The child need not share the asset with any of their siblings because legally, it belongs to the child. Even in situations where the child wants to share the money in the account, or the home, with their siblings, they will run into gift tax problems because they might have to make taxable, reportable gifts to their siblings, which ends up being more work than originally envisioned by the parent.
    • Simultaneous death: If all the owners were traveling and got into an accident at the same time, there could be a probate. Thus, naming a child on an account usually isn’t “safer” if you’re worried about accidents or anything of the sort.
    • Loss of step-up in basis: One of the most common reasons never to add a child, or anyone else, to an account as an owner is that the person added may lose the ability to take a step-up in basis on the assets when the original owner dies. For more information on how this works, please click here.

To avoid these added risks, it is recommended to use a trust whenever possible. (Read here to learn Why You Should Never Add your Child to Title). This avoids probate and is better from a tax standpoint, control standpoint, and efficiency standpoint.

Does probate depend on how much I own when I die?

Yes. But it doesn’t take much to trigger a probate.

In California, for assets that the decedent owned in their name only, there are generally two ways that their assets can end up in probate court:

  • Ownership of Real Property worth more than $55,425: If the decedent owned real property in their name that is valued at $55,425 or more, then there must be a probate before such property can be sold, refinanced, or retitled. In California, virtually all homes and real property are valued at significantly more than $55,425. In addition, the value of a property is determined by the Fair Market Value as of the date of death, and it does not matter whether there is a mortgage on the property. Thus, for example, a $300,000 property with a mortgage of $245,000 and equity of only $55,000 must still go through the probate process before any heirs can potentially inherit the property or cash. In this case, likely there will be nothing left to inherit given the fees of probate.
  • Total Assets value exceeds $166,250: If the decedent’s total “probatable assets,” including bank accounts, brokerage account, stocks, bonds, mutual funds and other investments collectively exceed $166,250, then there must be a probate before any distributions can be made to heirs. The assets values are all based on account value as of the deceased’s date of death. A “probatable asset” is an asset that has to go through probate (e.g., a home jointly owned or a retirement account with a beneficiary is not a “probatable asset”).

Often, people are unaware of the assets that the decedent may have owned.  In such situations, it’s imperative to create a list of all known assets first, including but not limited to personal property, financial accounts, and real property, and consult with the decedent’s financial or tax advisors, if any.  You may also be able to find out additional asset information by checking mail and/or old financial statements if you have access to them.

Once you have an estimated inventory of assets, you can better understand whether a formal probate based on the above criteria is required. If the decedent’s assets are valued at less than the above-mentioned thresholds, then it may be possible to use the small estates laws to avoid a full probate. However, you should consult an experienced probate attorney to determine whether this is applicable in your specific situation.

How much does probate cost?

The cost of probate includes court filing fees, costs of publishing notices in newspapers, appraisal costs, attorney’s fees, and personal representative fees to name a few.  The more complicated the probate process, for example if an heir contests the probate, the longer it can take, and the more it can cost in court filing and attorney’s fees.

Attorney’s fees and personal representative fees are set by state law and depend on the fair market value of each asset (as opposed to the equity the decedent had in the asset). For example, the Probate Code sets forth attorney’s and executor/administrator fees as follows:

  • 4% of the first $100,000 of the gross estate value
  • 3% of the next $100,000 of the gross estate value
  • 2% of the next $800,000 of the gross estate value
  • 1% of the next $9,000,000 of the gross estate value
  • ½% of the next $15,000,000 of the gross estate value

On top of these fees are what is also referred to as “extraordinary fees,” and can constitute items like sales of real property, disputes of wills, or handling tax issues related to the estate.

Generally, a basic probate can cost anywhere from 5-15% of the total estate value with more complicated probate matters costing even more.

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